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Sure, it's been a billion news cycles since then, but the Fed hasn't forgotten last spring's liquidity crisis that totaled Silicon Valley Bank, First Republic Bank, and Signature Bank -- and nearly spread throughout the entire sector.
According to a Bloomberg report on Wednesday, the central bank is quietly issuing wrist-slap warnings to similarly sized regional banks, such as Fifth Third Bancorp and Citizens Financial Group, in hopes of preventing the next implosion.
Savings and Groans
In the roughly five months since SVB went under, Moody's has downgraded the credit rating of 10 small-to-mid-sized lenders, including Commerce Bancshares and Old National Bancorp, while placing several larger lenders under review for a downgrade. In the meantime, the Fed's vice chairman of supervision, Michael Barr, has outlined various proposals for additional regulations.
Now, sources told Bloomberg, Barr is delivering specific warnings known as "matters requiring attention" and the slightly more urgent "matters requiring immediate attention," or MRAs and MRIAs, to regional banks with $100 billion to $250 billion in assets -- or so-called Category IV banks that are the same size as those that went under in March. Those same banks have largely faced loosey-goosey oversight in recent years, thanks to federal legislation passed in 2018 that reserved the toughest scrutiny for major banks with over $250 billion in assets.
With his wave of MRA and MRIA red flags, Barr is effectively rewriting the rules of regional bank regulation:
- The Fed's interest rate-hiking campaign put a sizable dent in the value of Treasuries and other bonds held by nearly all banks, and was one of the underlying causes of this year's banking run. Unlike major banks, however, Category IV's are exempt from recognizing those unrealized losses in their regulatory capital -- but now Barr wants those paper losses reflected in banks' capital ratios.
- Bloomberg also reported that Barr is concerned with Category IV's technological capabilities to access the Fed's discount window, the lending facility that helps commercial banks manage short-term liquidity issues. During the crisis, SVB and Signature Bank found themselves ill-equipped, tech-wise, to connect to the service, which some say accelerated their implosions.
On Notice: An MRA or MRIA warning isn't purely symbolic. While technically private, they still typically require board-level responses with specific timelines to rectify the identified flaws. "The bigger concern is the time frame we're talking about for resolution," Gary Bronstein, financial services lead at law firm Kilpatrick Townsend & Stockton LLP, told Bloomberg. "If banks are not resolving these issues pretty quickly, then we'll see enforcement actions." In other words, banks had better learn how to walk before there are runs.